the lgps and pooling - bny mellon · the lgps and pooling: ... virtual pooling arrangements do not...

Executive SummaryThe pooling of the Local Government Pension Scheme (LGPS) offers the potential for cost savings and efficiencies in many areas. However, transitioning from 89 schemes to six or eight is significantly complex.

The optimal vehicle for the pooling of the LGPS will be the Authorised Contractual Scheme (ACS), which will be run by an operator. This ACS should be set up on a co-ownership basis – the limited partnership structure is unlikely to be suitable because it does not facilitate easy segmentation of assets. Individual local authority funds within the pool will be represented on the governance board of the pool; ensuring engagement and accountability are maintained.

As well as engaging the services of professional advisors such as lawyers, auditors and investment managers, the operator will need to appoint a depositary. The depositary is in effect a corporate trustee and has a fiduciary responsibility to the investors of the fund, i.e. the local authorities. The depositary will appoint a global custodian. The operator will most likely appoint a fund administrator and a transfer agent. The move from the relatively light-touch regulatory environment of a defined benefit scheme which is managed on a stand-alone basis, to one where the assets of multiple defined benefit schemes will be managed on a collective basis and under permissions from the Financial Conduct Authority (FCA), is one that potentially will have a significant impact on the LGPS sector and there will need to be careful consideration of the new operating environment.The move from the relatively

light-touch regulatory environment of a defined benefit scheme which is managed on a stand-alone basis, to one where the assets of multiple defined benefit schemes will be managed on a collective basis is complex.

JULY 2016

The LGPS and Pooling: BNY Mellon Statement of Capability

CONTENTS

Executive Summary

1Introduction to Asset Pooling

2 Launching the ACS – operational considerations

6How can BNY Mellon help?

8Servicing your TTF

10Conclusion

18

2 // STATEMENT OF CAPABILITY – TAX TRANSPARENT VEHICLES

In this document we focus on the structural changes that the local authorities and the operators will need to manage. Specifically, within the ACS, the roles and responsibilities of:

– the depositary

– the global custodian

– the fund administrator

– the transfer agent

It is likely that the ACS’ will require significant advice and support as they move through concept to implementation. We have highlighted the support an ACS should expect to receive from its chosen service provider over the coming 18 – 24 months. Partnering with a service provider that has existing clients and a proven operating model is essential if you are to meet your deadlines.

Your service partner decision is crucial; you will be working with their change team and their relationship team for many years to come. A thorough due diligence is vital.

We trust this document outlines our commitment to the pensions sector, and to the LGPS in particular, and articulates our outstanding credentials and capability.

Introduction to Asset PoolingAsset Pooling is not a new concept and the enormous advantages of investing in pooled fund vehicles make them a suitable vehicle for investors. Mutual funds such as UCITS, OEICS, etc. are essentially created by monies from many individual investors that are aggregated for the purposes of investment. Investors in pooled fund investments benefit from economies of scale, which can allow for lower trading costs, diversification and exposure to expert asset managers. However, with such structures, there can be a limitation, namely the way in which the investor is treated from a tax perspective. This is due to the opaque nature of certain types of these vehicles. This is the obstacle that tax transparent structures look to address.

TAX TRANSPARENT POOLING

The pooling of assets in a fund which is transparent for tax purposes (i.e. a fund that has a ‘look-through’ to the underlying investors and their country of residence for income tax purposes), means that income from investments made by the fund accrue to each investor in proportion to their holding in the fund, without changing their character, source, and timing. This allows assets held in such a fund on behalf of the underlying investors to be managed through a single pool in proportion to the total assets or cash subscribed to the pool.

There are many recognised ‘tax transparent’ vehicles in different jurisdictions, such as: the Common Contractual Fund (CCF, Ireland), the Fonds Commun De Placement (FCP, Luxembourg), the Fonds Voor Gemene Rekening (FvGR, the Netherlands) and the Authorised Contractual Scheme (ACS, UK).


All of these structures are considered to be ‘entity pools’ rather than a ‘virtual pool’. The principal difference between the two being that whereas an entity pool will make use of legal structures such as collective investment schemes to deliver the tax advantages of pooling, virtual pooling will operate through the use of technology which facilitates pooled co-management of the assets of participating investors. Virtual pooling arrangements do not create a legal entity. The table below shows the key differences between the two.

Figure 1: Characteristics of Virtual Pool vs. Entity Pool

Virtual Pool Entity Pool

Investment Manager Invests assets at the pool level

No difference

Fund Administration/Transfer Agent

Allocates asset ownership according to tax profile of each investor

No difference

Sub Custody Holdings are held in a single omnibus account – when there is a dividend or a coupon on a stock or bond the custodian relies upon the Fund Administrator and Transfer Agent to advise on the breakdown of ownership of the assets by beneficial owner type

The Custodian provides the beneficial owner detail to the sub custodian who then allocates the holdings into the relevant omnibus account by beneficial owner type

The virtual pool arrangement would in effect be the ‘joint governance committee’ approach, made possible by contracts between the participating local authorities, and the other providers such as the custodian and administrator. These multilateral contracts and the governance required are complex and do not appear to have the confidence of HM Treasury as a means of achieving truly saleable pooling capable of delivering real economies. They have also proven difficult to implement, not least because the lack of a legal entity framework means each extra pool has to negotiate directly with regulators in different nation states. In a worst case scenario the regulators may consider that a collective investment fund has been formed and therefore the structure will be subject to the regulations that apply to ACSs.

POOLING VEHICLES IN THE UK – THE BACKGROUND

In 2013, the UK government introduced a new collective investment scheme, the UK Tax Transparent Fund (TTF). The introduction of the TTF brought the UK in line with other European fund centres where such vehicles have been in play for some time.

Whilst the key advantages of the TTF include tax benefits such as access to double taxation on withholding tax, VAT savings and Stamp Tax neutrality, there are other potential benefits which may make these vehicles appealing to investors, such as:

– Reduced management fees and costs due to economies of scale

– Greater diversity in the investment portfolio, enhancing returns

Whilst the key advantages of the TTF include tax benefits such as access to double taxation on withholding tax, VAT savings and Stamp Tax neutrality, there are other potential benefits which may make these vehicles appealing to investors.


In the autumn of 2015, the Department of Community and Local Government (DCLG) published its consultation paper which sought the views from the LGPS and other interested parties on the proposed changes to the current regulation. The deadline for response from the LGPS authorities on their proposed pooling arrangements and investment strategy was the 19th of February 2016, and by the 15th of July all schemes must make their final submission setting out:

– Which LGPS funds will come together to create the super pools

– Which structure will be adopted, ACS, JGC or other

– How the pool will manage risk

– Plans to address savings and reduce costs

– How to improve the ability to invest in infrastructure

THE STRUCTURE

Each pool set up as a fund structure will establish an Authorised Contractual Scheme (ACS) run by an operator. Individual local authority funds within the pool will be represented on the governance board of the pool, ensuring that engagement and accountability are maintained.

An ACS is a pooled asset vehicle, structured as a tax transparent fund (TTF) and an alternative legal structure to open-ended companies and unit trusts. The ACS’s tax characteristics, particularly with regard to recouping withholding taxes, having no stamp duty (except property which will be addressed in the Finance Bill 2016), and being exempt from VAT, can make it an attractive choice available in the UK for pools looking to bring together assets in a common vehicle to achieve economies of scale.

The ACS requires a board of directors – The ACS Operator is a FCA-authorised firm which assumes full control of the board. The board’s responsibilities include:

– dealing with the day-to-day operation of the company and managing the company’s investments,

– buying and selling the open-ended collective investment vehicle’s shares on demand, and

– ensuring the accurate pricing of shares at net asset value

To ensure the ACS meets its regulatory obligations, it will likely outsource the day-to-day running of the fund to service providers such as the fund accountant/administrator and the transfer agent. In addition, a depositary will be appointed. It is important to note that while the operator appoints the depositary, it is not an outsourced function, but rather a role in its own right. In turn the depositary is responsible for custody and the global custodian. The fund will also require tax, audit and legal advisors.

To ensure the ACS meets its regulatory obligations, it will likely outsource the day to day running of the fund to service providers such as the fund accountant/administrator and the transfer agent. In addition, a depositary will be appointed. It is important to note that while the operator appoints the depositary, it is not an outsourced function, but rather a role in its own right. In turn the depositary is responsible for custody and the global custodian. The fund will also require tax, audit and legal advisors.


Below is a diagram of the key players in the ACS structure:

Figure 2: The main participants within an ACS

The OperatorRegulated by FCA and subject to applicable regime (i.e. UCITS, AIFM)

Role & Responsibilities:Must hold quarterly board meetings and reporting

Appoints Service ProvidersCompliance and Oversight of management & administration of the fund

Investment Manager (IM)Responsible for

portfolio management Governed by InvestmentManagement Agreement

between the ACS and the IM

Administrator andTransfer AgentFund Valuation

Performance ReportingInvestor Dealing

and RelationsFinancial Reporting

Trust & DepositaryAppointed by the Operator

Oversight of Investment Managers, Administrator

and CustodianSafekeeping of Assets

Global CustodianAppointed by the Depositary

SafekeepingCash processing

Trade execution and settlementIncome ProcessingCorporate Events

Auditors Audit thefinancial

statementsof the fund

Tax Advisors Assist in

seeking taxopinions and

ruling

Legal Advisors Responsible for

FundDocumentation

Depositary – The depositary is a firm (usually a bank) authorised by the FCA, independent of the open-ended collective investment vehicle and of the directors of the vehicle. The depositary holds legal title to the vehicle’s investments and is responsible for their safe custody. The depositary can appoint sub-custodians to take custody of the assets but will remain ultimately responsible for the safekeeping. The depositary has responsibility for taking reasonable care to ensure the Operator complies with the key regulatory requirements. The shareholders have the rights to the vehicle’s assets. Fundamentally, the depositary protects the shareholders of the Fund who have the rights to the vehicle’s assets.

Fund Accountant/Administrator – Appointed by the operator, the fund accountant/administrator will be responsible for all aspects of the day-to-day accounting of the fund including the preparation, calculation and reporting of the Net Asset Value (NAV). The fund accountant will work closely with the operator, transfer agent and custodian. In addition to the calculation of the NAV, the fund accountant is responsible for:

– Securities data management and corporate actions processing

– Trade capture management

– Reconciliations

– Derivative support

– Expense processing

– Production of the annual and semi-annual financial statements

Fundamentally, the depositary protects the shareholders of the Fund who have the rights to the vehicle’s assets.


Transfer Agent – Appointed by the operator the role of the transfer agent is to maintain the records of the shareholder/unit-holder register of the fund. The transfer agent is typically the primary contact point between the fund and its investors. The core activities include:

– Investor AML and due diligence

– Establishing the tax status of investors

– Processing investor dealing – subscriptions/redemptions etc

– Working closely with the investment manager to provide cash reporting

– Issuing investor media – contract notes, statements etc

Legal and Audit Services – As noted the fund will generally appoint a law firm to coordinate discussions with the FCA as well as to assist in the drafting of the fund’s documentation such as the prospectus and service agreements that will be established with the preceding noted providers. The ACS will also require the services of an audit firm who will carry out the audit and sign off the financial statements. The fund’s auditor may also assist with more complex business such at taxation services and new product launches.

Launching the ACS – operational considerationsThe collective environment requires the ACS to appoint a depositary to jointly establish the TTF; in turn the depositary appoints a custodian. The operator will likely outsource the fund administration and transfer agency work to third parties. Typically, the depositary and custodian will be affiliated companies. Equally, the fund administrator and transfer agent are typically affiliated companies. Automated links and strong working relationships between the various parties are absolutely essential.

The underlying investors, namely the LGPS funds, should have the ability to benefit from UK double taxation agreements to put them in the same position from a tax perspective as if they had invested directly into the market. Thus it is vital that the investments held by each of the participants are tracked, along with income received and all associated withholding tax. Furthermore, the ACS must be able to appropriately determine what rates apply to each class and each income source; and correctly report the tax balances to each of the LGPS authorities invested in the ACS. In addition care needs to be taken in the systems required to follow the income from the source and back to the beneficial owner ensuring;

1. The correct entitlement is applied to the LGPS

2. Details of percentage ownership are available in real time

3. Ability to apply varying withholding tax and reclaim rates to the different investors (which is not applicable for the LGPS pooling vehicles as all investors are UK Pension Funds with the same tax status)

Whilst the ACS is purposefully designed to be recognised as tax transparent in the jurisdictions it is invested in, there can be challenges obtaining such a ruling. While tax rulings may be obtained for certain jurisdictions the ACS will also need to consider working with their tax advisor and the custodian to the ACS to arrange tax opinions and alleviate any potential tax leakage which would otherwise impact the investor’s return.

The collective environment requires the ACS to appoint a depositary to jointly establish the TTF; in turn the depositary appoints a custodian. The operator will likely outsource the fund administration and transfer agency work to third parties. Typically, the depositary and custodian will be affiliated companies. Equally, the fund administrator and transfer agent are typically affiliated companies. Automated links and strong working relationships between the various parties are absolutely essential.


Figure 3: A day in the life of a tax transparent fund

Allocation timings – assumption 12 :00 valuation point

In

vest

ors

Cus

tody

Tran

sfer

Age

ncy

Fund

Acc

ount

ing

Day 2 Day 1

Investors notify TA of anynew money by 12:00

Form showing unitcreations/

liquidationsproduced

UII – Units inIssue

Post Creations/Liquidations

Calculate pricesPost Dividendaccrual

Copy of file toFA for

reconciliationpurposes

Apply correctWHT/reclaimrates to each

class

File showing %of fund owned

by each investor

Data used toapportion dividend XD

Day 1 correctly intoWHT brackets

Prices sent to TAfor unit deals and %

allocations

Revised UII following creations/liq and FA prices are used to

calculate % allocations.File dated Day 1

FA receive unitcreations/

liquidations(midnight)

Price sent to TA

Inco

me

Pro

cess

ing

Form showingcash flows in/out

produced(13:00)

Form A sent toBNYM (info

only)

Pricescalculated as at

12:00

Figure 4: The investment into the ACS

TTF reporting

InvestorAccounts

Sub funds

TTF

£1mUK

€1mEuro

$1.5mUSA

£2mUK

£1m €1m $1.5m£2m

Subs/Reds

Investors LGPS 1 LGPS 2

LGPS 1

Global EQ 1 Global EQ 2 UK 1 UK 2 Fixed 1 Euro 1 US 1

LGPS 2 LGPS 2LGPS 2

ACS

Creation and liquidation instructions to the global custodian

Whilst the ACS is purposefully designed to be recognised as tax transparent in the jurisdictions it is invested in, there can be challenges obtaining such a ruling. While tax rulings may be obtained for certain jurisdictions the ACS will also need to consider working with their tax advisor and the custodian to the ACS to arrange tax opinions and alleviate any potential tax leakage which would otherwise impact the investor’s return.


How can BNY Mellon help?

OUR CREDENTIALS

We have extensive experience in administering tax transparent asset pooling arrangements across Europe, including the servicing of the single largest pooling vehicle with assets in excess of EUR140 billion. Our experience spans many years and we have developed an operating model to meet a variety of client needs. In 2014, we were appointed to provide depositary, custody and fund administration services to the UK’s first TTF. This underlines our commitment to support our clients, to innovate, and to better serve the market.

Figure 5: BNY Mellon’s Pensions Credentials

ACS

CollectiveInvestmentsTTFs

LGPSPensions

TTFs

Pensions LGPS

Collectives

Total # TTFs 124 (either separate funds or accounts within a fund)Total AUC for TTFs €148 billion (as at April 2015)Average # Beneficial Owners 6 investors

Delivered the UK’s first TTFServicing CCFs, FCPs and FvGRsProviding services to over 50 of the largest fund managers in the UK

16 LGPS clients5 Relationship Managers focused on the LGPS Sector Suite of over 30 reports designed to support LGPS clients

Over 2,600 Pension relationships totaling more than £2.4 trillion in assets Supporting over 400 pension schemes in Europe Over 140 direct UK and Irish pension fund relationships

Figure 6: LGPS pooling key dates

2013 2014 2015 2016 2016-20192016 2016

2013UK government introduces a new collective investment scheme, the UK Tax Transparent Fund

2014BNY Mellon are appointed Depositary, Custodian and Fund Administrator for the first ever UK TTF

February 2016BNY Mellon respond to the DCLG consultation and in tandem release their White Paper, LGPS Pooling – the collective good?

July 2016All LGPS stakeholders must submit their final pooling arrangements

2015Department of Community and Local Government (DCLG) publish consultation paper which seek the views from the LGPS on the proposed changes deadline 19.02.2016

April/May 2016BNY Mellon holds 2 day CPD Accredited Professional Training Programme for the LGPS funds moving into the new regulatory environment

2016-2019Creation of asset pools (phased in over 3 years)

We have extensive experience in administering tax transparent asset pooling arrangements across Europe, including the servicing of the single largest pooling vehicle with assets in excess of EUR140 billion.


SERVICE MODEL DESIGN

We have built our service models specifically to address the market and the needs of our clients. As clients increasingly target cross-border markets there is a growing requirement to support end-to-end processing, which whilst they might begin in the UK, span the globe for local servicing and centralised processing, culminating in the UK for delivery and oversight. We use the same technology and processes across the globe enabling us to deliver a seamless and consistent service for clients and distributors worldwide.

Figure 7: BNY Mellon’s Service Model Design

Transfer Agency

Fund Administration Custody

Additional Services Trustee

Reporting

Oversight

Event Servicing

Settlement

SafekeepingValuation

Tax Reporting

Financial Reporting

Securities Lending

Middle Office Services

Marketing Solutions

Account Processing

Deal ProcessingFX and Payment

Processing

Query Management

CSD/ICSDProcessing

Business Change Management

Fund EventsDebtor

Management and Reconciliation

Reporting

FundManagers

Brokers

From a TTF perspective we engage with specialist teams in the depositary, fund accounting and transfer agency, as well as our global custody and tax services teams, who provide the expertise and support needed by our clients. In this way we have been able to deliver a service focused on the complex requirements of a pooling vehicle with the benefit of engaging our expertise right across the globe.

Figure 8: Our tax transparent operating model

Daily NAV information per share class

Custody Accounting

Broker Sub-custodian

Transfer Agent

Daily Beneficial Owner %

breakdown file

Transactions

Eligible position file

Tax Reclaim file with details per Investor

Subscriptions/redemptions

Tax Services

Tax repository, Income events

Tax rates per Investor

BNY Mellon Client Tax Documentation System

Beneficial Owner tax rate Information

LGPS (beneficial owners)

Tax entitlements

Beneficial Owner tax documentation

Fund Manager

Securities Lending

Trustee and Depositary oversight

We have built our service models specifically to address the market and the needs of our clients. As clients increasingly target cross-border markets there is a growing requirement to support end-to-end processing, which whilst they might begin in the UK, span the globe for local servicing and centralised processing, culminating in the UK for delivery and oversight.


Servicing your TTF

RELATIONSHIP TEAM

Our service model provides clients with access to dedicated, locally-based individuals who understand your needs. We recognise the need to deliver an accessible and straightforward relationship management team that gives you a straight line of accountability.

Figure 9: Relationship team

Executive Owners

Relationship Management

Service Delivery

Business LineService Reviews

ScorecardReporting

Key PerformanceIndicators

Service LevelDescriptions Issue Tracking Hot Topic

Meetings

Managing the businessExecutive management engagement

Strategic business dialogueDrives the next generation of solutions

Dedicated and local relationship coverageProactively ensure satisfaction

Central contact for escalationBusiness planning

Delivering our serviceDeliver service obligations

Proactively identify trends and collaborate on solutionsEngineer constant service review meetings

TRUST & DEPOSITARY

We are a hugely experienced provider of trustee and depositary services to a wide variety of different fund structures such as UCITS and non-UCITS schemes. As a leading UK provider of depositary services to Alternative Investment Funds, arising from the recent introduction of the AIFMD into the UK market, our in-depth knowledge and experience will include providing guidance during the fund set-up phase through to the launch and ongoing support as your new product evolves through investor requirements, legal or regulatory change, or change in your strategy. In addition, you will benefit from our team’s experience with servicing the wider range of more traditional unit trust and OEICs in the UK. Our operational and relationship teams are highly experienced and have extensive industry knowledge.

GLOBAL CUSTODY

As a Global Systemically Important Financial Institution (G-SIFI), BNY Mellon is relied upon as a trusted partner to hold assets in safe custody in capital markets around the world. We offer global custody and accounting services built upon the industry’s first single multi-currency systems platform. We deliver a comprehensive range of global custody and related services in more than 100 markets. As of 31st March 2016, BNY Mellon had $29.1 trillion in assets under custody and/or administration making us the second largest provider in the market. We consistently rank highly in all the major global custody surveys, which is testimony to the excellent relationships we have with our clients. We have significant operations on the ground in Europe, in particular in Manchester, Brussels and London. In terms of our overall UK presence, we have been established here since 1967 and employ over 5,000 staff. We service a wide variety of clients including local government and corporate pension schemes, fund managers and insurance companies and have assets in custody in excess of £1 trillion. Our model operates on a global centre of excellence basis, with regional operating hubs supporting core processing activities in 3 regions (EMEA, Americas and APAC). This model enable us to process business on a round-the-

Our service model provides clients with access to dedicated, locally-based individuals who understand your needs.


clock basis, as well as on one common technology architecture which provides centralised processing, to facilitate automation and straight-through transaction processing. The regional centre of excellence model provides robust contingency DR processes, ensuring each centre can benefit from a ‘pass the book’ processing model, picking up the core processing activities of another if disaster recovery conditions are invoked.

GLOBAL TAX SERVICES

BNY Mellon Global Tax Services provides expertise and solutions helping clients navigate the complex global tax landscape in financial services. Our team of tax professionals are responsible for tax product development, research, risk management and client technical support. We analyse tax developments in 90+ markets and disseminate details of the impacts to both our BNY Mellon operations teams and clients. We work closely with tax authorities, governments and industry bodies on key tax developments to ensure both we and our clients maintain compliance and also have the opportunity to help shape future regulations.

As one of the largest custodians in the world, we have over 200 people working within our tax operations teams in locations around the globe. The teams are located so that interaction with the local market can be achieved on a real time basis.

Within our Global Tax team, we have a team of Tax Services Managers who are dedicated to the provision of tax support to tax transparent vehicles. This team is also unique in having supported the launch and subsequent development of the very first UK ACS. In addition to a normal tax research monitoring function, BNY Mellon deploys an additional layer of governance for tax transparent vehicles through the Tax Transparent Steering Group, individuals with specialist knowledge in their respective fields, and who bring over 150 years’ tax knowledge collectively to BNY Mellon. This team works closely with our tax teams in both the operational and servicing areas and will be available to discuss any matters of a complex and technical nature. We provide our clients with an individual tax specialist from this team who will work with you and your investors to assist with the tax related administrative work associated with the TTF.

Figure 10: TTF Tax Services

TTF

Tax Service Manager(day-to-day contact for all tax matters)

Tax Operations(200 staff)

(Background processing)

Tax Transparent Governance(oversight of product) representative to

meet with client every quarter or as needed

Global Tax Research Group(Part of Global Tax Services)

Our Tax Transparent Steering Group brings together individuals with 150 years of specialist tax knowledge.


FUND ADMINISTRATION

As LGPS Funds move into a regulated environment, we deliver the middle and back-office operational support designed to provide you with greater control, transparency and risk mitigation in your full range of investment activities. With our unique insight into the mutual fund industry, we offer a full array of administration services:

– Financial reporting

– Tax services

– Compliance

– Expense budgeting administration

FUND ACCOUNTING

Our global pricing and valuation platform is a real-time, multi-currency, double-entry accounting system that supports all major fund types including;

– Pooling vehicles

– Multi Manager

– OEICs (Open Ended Investment Companies)

– Unit trusts

– Life insurance funds

– Pension funds

– Master/Feeder

We have in place a dedicated fund accounting team, per client, to oversee and safeguard both the integrity and timeliness of the daily NAVs being produced for our clients. The dedicated fund accounting team assumes overall responsibility for all aspects of the fund accounting process and this team is supported by a number of centres of excellence from across our fund accounting business. These centres of excellence operate in the roles of trade capture management, security data management, corporate action management, derivative support, reconciliations and expense management. Each centralised team operates in a strictly controlled environment with all teams having agreed internal service delivery schedules. Adherence to these daily schedules is closely monitored by the fund accounting team, with weekly KPIs produced and provided to senior management giving full transparency of the process.

Figure 11: Fund Accounting Operating Model

NAV Analysis and ClientDelivery

Cash and AssetReconciliations

Trade CaptureManagement

Securities DataManagement

ExceptionManagement

Workflow Management

Regulatory Oversightand NAV Review

Inputs and controls Outputs and validation

KPIs, KRIs, and MIS

Dai

ly in

tera

ctio

n be

twee

n

Fund

Acc

ount

ing

and

Uti

litie

s.

Look

-thr

ough

to

unde

rlyi

ng

acti

vity

che

cks

Rev

iew

of i

nput

s an

d N

AV

calc

ulat

ion

acti

viti

es. N

AV

impa

ct r

evie

w r

anke

d by

se

veri

ty o

f exc

epti

ons

InternalLocal & Regional Management Committees, Legal Entity Boards,

Control & Risk Committees, Relationship Management & Service Directors

ExternalClients/Promoters, Investment Managers, Transfer Agents, Vendors,

Custodians, Prime brokers, Fund Boards, Trustees, Auditors

Reporting and Escalation (Internal and External)

Fund Accounting and Control

Exception Management

Activity and Checks

‘Nugget’ Activity

Derivative Support Central Expense Unit

We put in place a dedicated fund accounting team, per client, to oversee and safeguard both the integrity and timeliness of the daily valuations being produced for our clients.


TRANSFER AGENCY

We provide mutual fund transfer agency services for institutional shareholder accounts with some of the best-known names in the financial services industry. Our services are designed to be transparent to the end investor — from initial client inquiry through to fully customisable outputs, including:

– Comprehensive array of investor accounting, record-keeping and servicing capabilities offered under a single management structure of long-tenured professionals

– Networking resources with access to key strategic partners

– Industry experience and leadership within key industry organisations, enabling us to advocate on behalf of our clients

– Proven conversion methodology facilitates conversion risk management and efficient implementations

– Flexible technology facilitating nimble delivery of technology enhancements

– Tools to help asset managers achieve greater transparency into their omnibus data

– Streamlined reporting facilitating operational efficiencies

A culture of excellence is central to our service. Our clients, advisors and their customers regularly comment on the high quality of our people and our customer focus. Some of the key differentiators of our transfer agency services are:

– High quality, dedicated Service Delivery Managers

– Flexible and wide-ranging Service Level Agreements and KPIs

– High quality technology

– Comprehensive, flexible management reporting

– Unrivalled experience of client conversion

– A single pan-European operating model and platform

Figure 12: Transfer Agency Institutional Client Services (ICS) Operating Model

TTF reporting

Investor

Investment

TA ICS Team

TA ICS Team

LGPS 1 LGPS 2

via Dep

osit

ary

• Advise required documentation for new account opening including AML/KYC and Taxation• Documentation vetting option before sending to processing teams• Available to answer day-to-day enquiries• Carry out regular follow up to proactively seek update on tax status of investors• Offer support and hand-hold investor activity

TA ICS Dealing and Investor Servicing• Input account information and place/authorise deals

Beneficial Owner Tax Documentation Daily Beneficial Owner SplitsMI Report

Custody ClientOnboarding Team Fund Accounting

TA ICS Box Management • Report generated for ‘Beneficial Owner Splits’

A culture of excellence is central to our service. Our clients, advisors and their customers regularly comment on the high quality of our people and our customer focus.


LAUNCH & CHANGE MANAGEMENT

We have a dedicated Business Change Group which acts as a single point of contact for all clients or client operational change, and is responsible for managing project deliverables and product launches. The Business Change Group has responsibility for:

– Programme management of conversions and new product/fund launches

– Project and programme management for incremental changes, client service projects, business analysis

– Dedicated client solutions such as sales support and due diligence, validation of operating models, project scoping and feasibility analysis, product sponsorship

– Steering Group fortnightly meetings to provide overall direction and management, approval to major plans and potential deviations, major issue management

– Working Committee weekly meetings, with two main components: Programme management and business architecture to provide ongoing project leadership and issue resolution

– Project management through a team of project managers, business subject matter experts and technology experts to ensure the delivery of specific work products and grant the required escalation mechanisms as needed

– Project Teams assigned to the project to deliver on a daily basis activities/work products, prepare project documentation, liaise with operations teams

– Project Office supporting project management activities through plan/status updates, issues and document management, change control activities

Figure 13: Overview of BNY Mellon Project Governance Structure

Commercial, Compliance and Legal Workstream

Joint Service Delivery Workstream

Joint Technology Workstream

Custody & Depository Workstream

Fund Accounting Workstream

Transfer Agency Workstream

Joint Steering Committee

Business Sponsor

Programme Manager

TA Lead Client Project Lead

Reporting ReportingJoint JSC Reporting

Client Project Lead

Client Project Lead

Client IT Lead

Supplier Management

Compliance/Risk LegalRepresentative

Commercialand LegalCompliance/Risk

FA SME Lead

Custody SME Lead

Data/IT Lead

Service Delivery

Business Sponsors

Programme Manager

Securities Data Management SME Lead

ACS

Figure 14: Indicative timeline of steps to target pooling structure

StructuralOrganisation

Implementationof Pooling

Investment Analysisand Planning

Ongoing discussions with FCAre Operator submission

Legal, Regulatory &Tax Stream

Analysis of optimal number ofmanagers required for each

Sub Fund

Investment/OperationalStream

Execution of markettransactions to trade the

portfolios to the target model

Market review to identify target investment managers

for new mandates

Recruit Operator team – including FCA Authorised

Appointments

Determine number ofSub Funds and initial

indication of the LGPS fundsto be linked to each

StructuralOrganisational

Stream

Market review toappoint Transition Manager

Operator to Appoint: • Depositary (Custodian)

• Fund Administrator • Transfer Agent/Registrar

Transfer of assets fromindividual LGPS to Sub Funds

(in-specie/cash)

Conclude FCA fund approval process

Agree approach to tax rerulings and opinions

Commence discussions withFCA on Operator approval

We have a dedicated Business Change Group which acts as a single point of contact for all clients or client operational change, and is responsible for managing project deliverables and product launches.


Technology – Our Workbench web portal and mobile app provides clients with the following benefits:

– Secure single sign-on

– Real-time account information

– Customised interactive data views

– Automated data delivery to e-mail and ftp

– Easy drill-down into details

– Regulatory reporting and updates

– Instruction entry and upload

– Browser and mobile interfaces

Figure 15: Workbench

Interactive reporting

Instructionprocessing

Corporate governance

Global newsupdate

Regulatory news

Market and depository reports

Superior STP ratesAverage greater than 95%

WorkbenchSM

ONE GLOBAL PLATFORM

SWIFT expertiseIn top three by overall volume in United States

InterfacesFull complement of CAMRA and PAMInterfaces

Dedicated supportFocused on optimisation and enhancements

ONE STOP SHOP FOR ALL YOUR TTF SERVICING

BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Below are some of the ancillary services that could support the servicing of your TTF.

Figure 16: Expertise throughout the investment lifecycleWe create assets to provideaccess to capitalCORPORATE TRUSTDEPOSITARY RECEIPTSMARKETS GROUP

We trade assets to enable you to sieze new opportunitiesBROKER-DEALER SERVICESMARKETS GROUPPERSHINGTREASURY SERVICES

We hold and service assets to help keep investments secureASSET SERVICINGMARKETS GROUPPERSHINGWEALTH MANAGEMENT

We restructure assets to support yourchanging financial needsCORPORATE TRUSTMARKETS GROUP

We distribute assets to deploy your capital more efficientlyINVESTMENT MANAGEMENTMARKETS GROUPPERSHING

We manage assets to supportyour specific investment goalsINVESTMENT MANAGEMENTPERSHINGWEALTH MANAGEMENT

MANAGEASSETS

HOLDAND SERVICE

ASSETS

TRADE CLEARAND SETTLE

ASSETS

DISTRIBUTEASSETS

RESTRUCTUREASSETS

OURCLIENTS

CREATEASSETS

BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle.


– Currency Administration – we integrate and administer all components of a passive currency hedging program (share-class or portfolio overlay), as well as providing FX execution services. Through our approach, you retain all investment management discretion, while outsourcing administration and FX operational functions to BNY Mellon. This provides you with the opportunity to re-deploy valuable resources so you can focus on your primary mission along with the potential to reduce operational risk and exposure.

– Private Debt and Loan funds – These asset classes are a strategic focus for BNY Mellon, and a core component of our Private Equity and Real Estate strategy. We currently provide administration services to over USD 235 billion in various loan types and provide full fund, loan and depositary services globally. We are able to share trends in the market that we see, structures that are being used, and how investors are accessing the fund framework, including the use of securitisation vehicles.

– Securities Lending – We are a leading provider of robust, innovative product and technology solutions custom designed for the intricate and rapidly evolving requirements of today’s institutional clients. We work with our clients to develop a customised securities lending programme, creating a well-balanced strategy and utilising the client’s portfolio in consideration of their risk tolerance. Our traders possess the tools and abilities to negotiate with borrowers to optimise the return from each lending opportunity, adding additional value to our clients’ portfolios.

– Global Collateral Services: We offer a comprehensive suite of capabilities to help our clients address their collateral, liquidity and securities financing needs. As they face evolving global regulations and rapidly changing market requirements, clients can leverage BNY Mellon’s products and services to better manage counterparty and market risk in their collateral transactions, engage in more investment opportunities to help maximise their investment returns and access new financing alternatives.

– Global Risk Solutions – our complete suite of performance measurement services uses industry standard methodologies. From individual security performance to the overall fund, results are available for analysing investments, sub funds and asset classes. In addition to calculating performance at the overall fund level, we can also offer share class specific performance reporting. Attribution tools break down key factors that drive performance and to compare these against a benchmark. Analysis includes:

– Equity/Multi Asset Class Attribution

– Multi-Factor/Fixed Income Attribution

Post Trade Compliance Monitoring of investment restrictions is offered as part of our daily reporting services and forms part of our Risk and Compliance Reporting (RCR) service. Marketing Support Services (MSS): our internal group can support the production of KIID documents and Fund Factsheets.

A wave of global regulatory changes followed the 2008 financial crisis. Among them were the Foreign Account Tax Compliance Act (FATCA), Target-2 Securities (T2S), UCITS V and Alternative Investment fund Manager Directive (AIFMD). Our industry leadership position, product breadth and deep understanding across various disciplines provided us with the necessary tools to deliver top-of-the-line regulatory compliance solutions to our clients.


REGULATORY SUPPORT

A wave of global regulatory changes followed the 2008 financial crisis. Among them were the Foreign Account Tax Compliance Act (FATCA), Target-2 Securities (T2S), UCITS V and Alternative Investment fund Manager Directive (AIFMD). Our industry leadership position, product breadth and deep understanding across various disciplines provided us with the necessary tools to deliver top-of-the-line regulatory compliance solutions to our clients. With all of our clients, we are preparing ‘regulatory roadmaps’ which are aimed at guiding them through the specific regulatory changes which will affect their products.

Figure 17: Regulation timeline (for illustrative purpose only)

2015 2016 2017 2018 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

T2S Wave 1

FATCA Report investor details to IRS/local tax authorities

Solvency II Publicconsultationon Set 2 ofimplementingstandards

CSDR CSDs must beauthorised andcomply with CSDR

CSDR CSDs mustapply forauthorisation

UCITS V Compliance date 18 March

MiFID II Transaction reporting review

BBRD Effective

OECD Common Reporting Standard Effective

FTT Effective

T2S Wave 3

Asian Funds Passport Effective

Volcker Compliant 3

EMIR Central Clearing Obligation

MiFID II Comes into effect

Solvency II Comes into force 1st January 2016

PRIIPS Requirement to prepare a KID comes into effect

CSDR Compliance with T2S settlement structure

CRD IV • Higher min cap requirements • Intro of the Liquidity Coverage Ratio (LQR)

T2S Wave 2

EU MM Reforms published

FATCA USFI/FFI withholdingon gross proceedsbegins

CASS CASS compliant

Securities Law Legislation Final legislationexpected

CRD IV Commission to reporton leverage ratio andpossibly a legislativeproposal to make itbinding as of 2018

T2S Contingency wave

UCITS V Depositories of UCITSappointed prior to transpositiondate that do not meet eligibilitycriteria given until end of 2017to meet this criteria

ELTIFs Likely to come into effect

CRD IV Start of gradual phase-in of conservation buffer

RDR II Rules in relation tolegacy paymentscome into force

MiFID II RTS issued

IORP II EC adopt legislative proposal for new rules on IORPs

SRD Possible date for directive

EC Deposit Guarantee Scheme Directive (DGS) Compliant

CMU priority items implemented

Q1 2018 Introduction of the Net Stable Funding Ratio (NSFR)

OECD Common Reporting Standard Compliant

T2S Wave 4

US MM Reform Compliant

OECD Common Reporting Standard Compliant

Volcker Compliant 1

SEC Nationally Recognised Statistical Rating Organisation Rules (NRSRO) Compliant

SWRR Effective

Credit Rating Agency Directive Effective

MAD Comes into effect

SWRR Compliant

SRD Possible date for implementation

PRIIPS Compliant

MM Reform Compliant 3

PRIIPS UCITs funds KIID to be replaced by PRIIPs KID

MAD Comes into effect


ConclusionBNY Mellon employs over 51,000 staff worldwide. We have provided services to clients in Europe, the Middle East and Africa (EMEA) since the early 1900s. Today, BNY Mellon remains committed to the EMEA region with over 9,000 staff across Europe, of which over 5,000 are based in the UK, and is strongly positioned to work closely with local authorities to assist them in accessing global capital markets.

We believe in developing strong relationships with our clients. Our focused business strategy and commitment to pooling and delivering innovative solutions to the market will ensure continued success for your asset pools. Our combination of superior technology and world-class products and services, delivered by an experienced and motivated team, provide you with the best solutions for requirements that continue to evolve.

We are a proven provider of investment services. In Europe today we administer 124 TTFs and hold in custody $700 billion for 400 European pension funds. We are consistently rated as one of the strongest and safest US banks. We deliberately maintain a fortress-like balance sheet and are proud of our place in the world as a G-SIFI (Global Systemically Important Financial Institution). More than three quarters of our revenues are fee-based, giving us steady earnings and removing the challenges of managing a more volatile business mix.

As you look to choose a service provider we believe our ability to offer, within one family, all of your core needs is a significant advantage as it facilitates deep integration and straight-through processing. These in turn provide you with the assurance that the operating environment is tightly controlled, and allows you and your managers’ longer trade and settlement deadlines, as well as economies of scale.

We have first-hand experience of the work involved in launching a TTF and will be responsible with you for ensuring that the fund project is a success through launch and beyond. We have a very robust and well-proven transition process in place and will commit a team with direct understanding of the issues and the experience to deliver a successful outcome for your project. The same team will remain assigned to you to deal with any future change requests so that they leverage their relationship knowledge for your benefit.

We trust our commitment to the LGPS has been demonstrated by our continued thought leadership and investments in education:

– White Paper, LGPS Pooling – The Collective Good?1

– Two day CPD-accredited professional training programme focused on supporting the LGPS funds as they move to the regulated investment funds environment

– Access to other BNY Mellon intellectual capital such as our depositary bank experts and our tax services experts, who together have over 150 years’ experience servicing our clients

We would be delighted to meet with you to discuss how your TTF or alternative arrangement will be structured and how BNY Mellon can support your business.

We have first-hand experience of the work involved in launching a TTF and will be responsible with you for ensuring that the fund project is a success through launch and beyond. We have a very robust and well proven transition process in place and will commit a team with direct understanding of the issues and the experience to deliver a successful outcome for your project.

1 https://www.bnymellon.com/emea/en/our-thinking/pooling-the-uks-local-government-pension-scheme.jsp


Contact usFor more details on how we can help you please contact:

Dean Handley T +44 20 7163 5458 M +44 7764 293 535 [email protected]

Andrea Lennon T +353 1 900 5018 M +353 87 9925 043 [email protected]

bnymellon.comBNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may be used as a generic term to reference the corporation as a whole and/or its various subsidiaries generally. This material and any products and services may be issued or provided under various brand names in various countries by duly authorized and regulated subsidiaries, affiliates, and joint ventures of BNY Mellon, which may include any of the following. The Bank of New York Mellon, at 225 Liberty St, NY, NY USA, 10286, a banking corporation organized pursuant to the laws of the State of New York, and operating in England through its branch at One Canada Square, London E14 5AL, UK, registered in England and Wales with numbers FC005522 and BR000818. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the US Federal Reserve and authorized by the Prudential Regulation Authority. The Bank of New York Mellon, London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon operates in Europe through its subsidiary The Bank of New York Mellon SA/NV, a Belgian public limited liability company authorised and regulated as a significant credit institution by the European Central Bank (ECB), under the prudential supervision of the National Bank of Belgium (NBB) and under the supervision of the Belgian Financial Services and Markets Authority (FSMA) for conduct of business rules, and registered in the RPM Brussels (Company n° 0806.743.159), with registered office at Rue Montoyerstraat, 46, B-1000 Brussels, Belgium. The Bank of New York Mellon SA/NV operates in England through its branch at 160 Queen Victoria Street, London EC4V 4LA, UK, registered in England and Wales with numbers FC029379 and BR014361. The Bank of New York Mellon SA/NV (London Branch) is authorized by the ECB and subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from us on request The Bank of New York Mellon SA/NV operating in Ireland through its branch at 4th Floor Hanover Building, Windmill Lane, Dublin 2, Ireland trading as The Bank of New York Mellon SA/NV, Dublin Branch, is authorised by the ECB and is registered with the Companies Registration Office in Ireland No. 907126 & with VAT No. IE 9578054E. The Bank of New York Mellon, DIFC Branch (the “Authorised Firm”) is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorised Firm is regulated by the Dubai Financial Services Authority and is located at Dubai International Financial Centre, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE. The Bank of New York Mellon, Singapore Branch, subject to regulation by the Monetary Authority of Singapore. The Bank of New York Mellon, Hong Kong Branch, subject to regulation by the Hong Kong Monetary Authority and the Securities & Futures Commission of Hong Kong. If this material is distributed in Japan, it is distributed by The Bank of New York Mellon Securities Company Japan Ltd, as intermediary for The Bank of New York Mellon. Not all products and services are offered in all countries. Material contained within this document is intended for the purpose of information only. It is not intended to provide professional counsel or investment advice on any matter, and is not to be used as such; you should obtain your own independent professional advice (including financial, tax and legal advice). The views expressed within this document are those of the contributors only and not those of The Bank of New York Mellon or any of its affiliates or subsidiaries (the “Bank”), and no representation is made as to the accuracy, completeness, timeliness, merchantability or fitness for a specific purpose of the information provided in this presentation. No statement or expression is an offer or solicitation to buy or sell any products or services mentioned. The Bank assumes no liability whatsoever for any action taken in reliance on the information contained herein, or for direct or indirect damages or losses resulting from use of this document, its content, or services. Past performance is not indicative, nor a guarantee, of future results. The contents of this document may not be comprehensive or up-to-date, and the Bank will not be responsible for updating any information contained herein. This document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Any unauthorised use of information contained in this document is at the user’s own risk and any reproduction, distribution, republication and retransmission is prohibited unless the prior consent of the Bank has been obtained.

© 2016 The Bank of New York Mellon Corporation. All rights reserved.

06/2016 DRC 1043

T4386 06/16

the lgps and pooling - bny mellon · the lgps and pooling: ... virtual pooling arrangements do not...

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